Market Value and Patent Citations

The goal of this paper is to explore the usefulness of patent citations as a means to tackle the huge heterogeneity of patented innovations in determining the stock market value of firms, and to further validate the informational content of patent citations in terms of economic impact. This project was made possible by the creation of a comprehensive data file on patents and citations for 1963-1999, comprising 3 million US patents and 16 million citations, and the matching of assignee names to Compustat. We estimate Tobin’s q equations on R&D to assets stocks, patents to R&D, and citations to patents. We find that each ratio impacts significantly market value, with an extra citation per patent boosting market value by 3%, and firms with 20 citations and more commanding a 54% premium. The impact of citations per patent is highest for Drugs, and low for Computers and Communications. We probe into the timing of information revelation by citations, and find that “future” citations capture virtually the full impact of total citations, and that “unpredictable” citations have a stronger effect than the predictable portion. Self-citations are more valuable than citations coming from external patents, but this effect decreases with the size of the patent portfolio held by the firm.